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Does the Residence Nil Rate Band have any impact on estate planning strategies?

Private Clients

Will Laws

04.07.2017

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The introduction of the Residence Nil Rate Band may be great news for some, but it won’t change the need for most investors to take great care when planning their estate.

Oxford Capital is not able to offer financial advice and this blog should not be construed as advice. Tax planning and EIS tax reliefs depend on individual circumstances and are subject to change.

Before the 2015 general election, the Conservative party pledged to help more people pass their family home to the next generation without creating an Inheritance Tax (IHT) bill. To make good on that promise, George Osborne (back in the days when he had just one job) announced the Residence Nil Rate Band in his 2015 summer budget. That may seem like a political lifetime ago, but from April 6th 2017 the policy finally took effect.

How does the Residence Nil Rate Band (RNRB) work?
The nil rate band is the part of an estate that can be passed to the beneficiaries without being subject to Inheritance Tax. Since 2009, the nil rate band has been set at £325,000. For married couples and civil partners, the nil rate band can be transferred to the last surviving individual, effectively allowing the couple to pass on wealth of up £650,000 without incurring IHT.

But as house prices have continued to rise, more and more beneficiaries find themselves compelled to sell an inherited family home in order to settle the IHT bill.

The RNRB boosts the existing arrangements, allowing up to an extra £175,000 to be inherited tax-free, providing the estate includes a main family home of at least that value.

At a superficial level, this means that a couple can now leave an estate of up to £1m* without the beneficiaries having to pay a penny of IHT.

Is it really that simple?
Many commentators have argued that increasing the standard nil rate band would have been a far more straightforward rule change. The legislation introducing the residence nil rate band is unfortunately complex.

For investors hoping to make use of the RNRB, and the potential £140,000 IHT saving that comes with it, some of the key issues to keep in mind include:

The house must be passed to the investor’s ‘direct descendants’
The RNRB is only available in relation to the main family home, which must be passed to the deceased’s children, grandchildren or other ‘direct descendants’.

The RNRB is being phased between now and 2020/21
For the 2017/18 tax year, the RNRB is set at £100,000. It will increase £25,000 each year until 2020/21, when it will reach its maximum limit of £175,000.

When the allowance is passed to a surviving spouse or civil partner, the eventual RNRB applied to the estate will be the same as the allowance applied on the death of the survivor. In other words, if the first death occurs this year but the widow survives until 2021, the £175,000 RNRB applies to both individuals, giving a combined total of £350,000.

The amount of RNRB available is tapered for larger estates
The RNRB is reduced by £1 for every £2 of the estate’s value after the first £2m. For example, an estate worth more than £2.2m does not stand to benefit at all from the current RNRB of £100,000.

This rule may create planning opportunities for couples who can arrange ownership of their collective assets such that neither individual’s estate exceeds £2m, thereby maximising the RNRB available.

It is still possible to downsize
The RNRB makes provision for individuals who wish to move into smaller accommodation, so there may be no need to rattle around in the family home purely for IHT purposes.

In simple terms, the downsizing provisions mean that if an individual sells their only residence and moves into a less valuable home (or into rented accommodated), an additional nil rate band allowance is made available to compensate for the lost RNRB.

The additional allowance available in these circumstances will be approximately equal to the lower of the lost RNRB or the value of assets left to direct descendants.

Other assets remain exposed to IHT
At the risk of stating the obvious, it’s important to remember that the RNRB only applies to the family home. Any other assets, including second homes, in excess of the available allowances will still be subject to IHT. For many investors, particularly High Net Worth individuals, the introduction of the RNRB is unlikely to remove the need for estate planning using other strategies, such as lifetime gifting, potentially exempt transfers, trusts and Business Property Relief investments.

It may be a good idea to seek professional advice
As mentioned above, the rules relating to the RNRB are complicated. This brief blog really only scratches the surface. Investors who want to make sure they maximise the benefit from the new rules may wish to speak to a professional adviser. This is particularly important for investors who already have arrangements such as wills or trusts in place, or who have made lifetime transfers of assets.

In summary, the RNRB is a welcome increase to the IHT allowances available to investors, but the complexity of the rules means that careful planning is still required.

*On the death of the first individual, the nil rate band of £325,000 and residence nil rate band of £175,000 both pass to the survivor, doubling the effective band on death of the second individual.

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